UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549








FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
thirteen weeks ended March 29,
2008





o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from _______to _______







Commission
File Number 1-5084





TASTY
BAKING COMPANY


(Exact
name of Company as specified in its charter)








Pennsylvania
            23-1145880(State
      of Incorporation)
            (IRS
      Employer Identification Number)








2801
Hunting Park Avenue, Philadelphia, Pennsylvania  19129


(Address
of principal executive offices including Zip Code)





215-221-8500


(Company's
telephone number, including area code)











Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


YES  x  NO o








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):




Large
      accelerated filer
              o
              Accelerated
      filer
              xNon-accelerated
      filer
              o
              Smaller
      reporting company
              x








Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES o    NO
x








There were
8,308,646 shares of Common Stock outstanding as of May 2, 2008.











TASTY
BAKING COMPANY AND SUBSIDIARIES








INDEX







PART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements (Unaudited)Condensed Consolidated Balance SheetsMarch 29, 2008 and December 29, 2007
              3Condensed Consolidated Statements of
      OperationsThirteen weeks ended March 29, 2008 and March 31,
      2007
              4Condensed Consolidated Statements of Cash
      FlowsThirteen weeks ended March 29, 2008 and March 31,
      2007
              5Notes to Condensed Consolidated Financial
      Statements
              6-16Item
      2.
              Management's Discussion and Analysis of
      FinancialCondition and Results of Operations
              17-20Item
      3.
              Quantitative and Qualitative Disclosure about Market
      Risk
              21Item
      4.
              Controls and Procedures
              21PART
      II.
              OTHER INFORMATIONItem
      6.
              Exhibits
              22Signature
              
              23r3




-2-





Part
I.            FINANCIAL
INFORMATION


Item
1.          Financial
Statements







TASTY
      BAKING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(000's)
  March
      29, 2008
                
                
                December
      29, 2007AssetsCurrent
      assets:Cash
                
                
                73
                
                
                
                57Receivables,
      less allowance of $2,321 and $2,608, respectively
                
                
                20,242
                
                
                
                19,358Inventories
                
                
                7,245
                
                
                
                7,719Deferred
      income taxes
                
                
                1,547
                
                
                
                1,547Prepayments
      and other
                
                
                2,930
                
                
                
                2,303Total
      current assets
                
                
                32,037
                
                
                
                30,984Property,
      plant and equipment:Land
                
                
                1,433
                
                
                
                1,433Buildings
      and improvements
                
                
                49,963
                
                
                
                49,874Machinery
      and equipment
                
                
                126,809
                
                
                
                126,132Construction
      in progress
                
                
                17,723
                
                
                
                9,425195,928
                
                
                
                186,864Less
      accumulated depreciation
                
                
                115,792
                
                
                
                112,77480,136
                
                
                
                74,090Other
      assets:Long-term
      receivables from independent sales distributors
                
                
                9,968
                
                
                
                9,889Deferred
      income taxes
                
                
                7,393
                
                
                
                6,396Other
                
                
                3,347
                
                
                
                3,16220,708
                
                
                
                19,447Total
      assets
                
                
                132,881
                
                
                
                124,521LiabilitiesCurrent
      liabilities:Accounts
      payable
                
                
                5,121
                
                
                
                6,210Accrued
      payroll and employee benefits
                
                
                3,276
                
                
                
                4,080Cash
      overdraft
                
                
                2,429
                
                
                
                890Current
      obligations under capital leases
                
                
                431
                
                
                
                431Other
      accrued liabilities
                
                
                4,664
                
                
                
                5,343Total
      current liabilities
                
                
                15,921
                
                
                
                16,954Asset
      retirement obligation
                
                
                6,768
                
                
                
                6,676Accrued
      pensions
                
                
                16,301
                
                
                
                16,502Long-term
      obligations under capital leases, less current portion
                
                
                895
                
                
                
                1,003Long-term
      debt
                
                
                36,778
                
                
                
                25,697Other
      accrued liabilities
                
                
                3,379
                
                
                
                2,888Postretirement
      benefits other than pensions
                
                
                7,397
                
                
                
                7,365Total
      liabilities
                
                
                87,439
                
                
                
                77,085Shareholders'
      equityCommon
      stock, par value $0.50 per share and entitled to one
                
                
                4,558
                
                
                
                4,558vote
      per share: Authorized 30,000 shares, issued 9,116
    sharesCapital
      in excess of par value of stock
                
                
                28,882
                
                
                
                28,683Retained
      earnings
                
                
                23,746
                
                
                
                25,119Accumulated
      other comprehensive income
                
                
                174
                
                
                
                634Treasury
      stock, at cost
                
                
                (11,918
                )
                
                
                (11,558
                )Total
      shareholders' equity
                
                
                45,442
                
                
                
                47,436Total
      liabilities and shareholders' equity
                
                $
                132,881
                
                
                $
                124,521
  The accompanying
notes are an integral part of these unaudited condensed consolidated financial
statements.




-3-




TASTY
BAKING COMPANY AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(000’s,
except per share amounts)




For
      the Thirteen Weeks EndedMarch
      29, 2008
              
              
              March
      31, 2007Gross
      sales
              
              $
              69,294
              
              
              $
              70,381Less
      discounts and allowances
              
              
              (26,472
              )
              
              
              (26,056
              )Net
      sales
              
              
              42,822
              
              
              
              44,325Costs
      and expenses:Cost
      of sales, exclusive of depreciation shown below
              
              
              28,794
              
              
              
              27,961Depreciation
              
              
              3,030
              
              
              
              1,652Selling,
      general and administrative
              
              
              12,012
              
              
              
              13,225Interest
      expense
              
              
              456
              
              
              
              315Other
      income, net
              
              
              (199
              )
              
              
              (230
              )44,093
              
              
              
              42,923Income
      (loss) before provision forincome
      taxes
              
              
              (1,271
              )
              
              
              1,402Provision
      (benefit) for income taxes
              
              
              (312
              )
              
              
              526Net
      income (loss)
              
              $
              (959
              )
              
              $
              876Average
      common shares outstanding:Basic
              
              
              8,034
              
              
              
              8,033Diluted
              
              
              8,034
              
              
              
              8,270Per
      share of common stock:Net
      income (loss):Basic
              
              $
              (0.12
              )
              
              $
              0.11Diluted
              
              $
              (0.12
              )
              
              $
              0.11Cash
      dividend
              
              $
              0.05
              
              
              $
              0.05




The accompanying notes are
an integral part of these unaudited condensed consolidated financial
statements.





-4-




TASTY
BAKING COMPANY AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OFCASH FLOW


(Unaudited)


(000’s)




For
      the Thirteen Weeks EndedMarch
      29, 2008
              
              
              March
      31, 2007Cash
      flows from (used for) operating activitiesNet
      income (loss)
              
              $
              (959
              )
              
              $
              876Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:Depreciation
              
              
              3,030
              
              
              
              1,652Amortization
              
              
              76
              
              
              
              141Asset
      retirement obligation interest
              
              
              92
              
              
              
              -Loss
      on sale of routes
              
              
              -
              
              
              
              6Defined
      benefit pension benefit
              
              
              (146
              )
              
              
              (46
              )(Increase)
      decrease deferred taxes
              
              
              (690
              )
              
              
              186Post
      retirement medical
              
              
              (425
              )
              
              
              (570
              )Other
              
              
              (261
              )
              
              
              334Changes
      in assets and liabilities:Increase
      in receivables
              
              
              (836
              )
              
              
              (3,507
              )Decrease
      in inventories
              
              
              474
              
              
              
              95Increase
      in prepayments and other
              
              
              (704
              )
              
              
              (777
              )Increase
      in accrued taxes
              
              
              207
              
              
              
              341Decrease
      in accounts payable, accruedpayroll
      and other current liabilities
              
              
              (2,779
              )
              
              
              (1,053
              )Net
      cash used for operating activities
              
              
              (2,921
              )
              
              
              (2,322
              )Cash
      flows from (used for) investing activitiesPurchase
      of property, plant and equipment
              
              
              (8,877
              )
              
              
              (571
              )Proceeds
      from independent sales distributor loan repayments
              
              
              813
              
              
              
              641Loans
      to independent sales distributors
              
              
              (989
              )
              
              
              (639
              )Other
              
              
              (106
              )
              
              
              (6
              )Net
      cash used for investing activities
              
              
              (9,159
              )
              
              
              (575
              )Cash
      flows from (used for) financing activitiesDividends
      paid
              
              
              (413
              )
              
              
              (411
              )Borrowings
      on long-term debt
              
              
              39,790
              
              
              
              3,004Payment
      on long-term debt
              
              
              (28,819
              )
              
              
              -Net
      increase in cash overdraft
              
              
              1,538
              
              
              
              304Net
      cash from financing activities
              
              
              12,096
              
              
              
              2,897Net
      increase in cash
              
              
              16
              
              
              
              -Cash,
      beginning of year
              
              
              57
              
              
              
              12Cash,
      end of period
              
              $
              73
              
              
              $
              12Supplemental
      Cash Flow InformationCash
      paid during the period for:Interest
              
              $
              386
              
              
              $
              317Income
      taxes
              
              $
              23
              
              
              $
              -




The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.




-5-




Notes to
Condensed Consolidated Financial Statements


(000’s,
except share, per share and square footage amounts, unless otherwise
noted)


All
disclosures are pre-tax, unless otherwise noted.





1.      Summary
of Significant Accounting Policies





Nature
of the Business


Tasty
Baking Company (the “Company”) is a leading producer of sweet baked goods and
one of the nation’s oldest and largest independent baking companies, in
operation since 1914.  It has two manufacturing facilities, one in
Philadelphia, PA, and a second in Oxford, PA.





Fiscal
Year


The
Company and its subsidiaries operate on a 52-53 week fiscal year, ending on the
last Saturday of December.  Fiscal year 2008 is a 52-week
year.  Fiscal year 2007 was a 52-week year.





Basis
of Presentation


The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.





The
condensed consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) have
been condensed or omitted pursuant to such rules and
regulations.  In the opinion of the Company, the accompanying
unaudited condensed consolidated interim financial statements reflect all
adjustments, consisting of only normal recurring items, which are necessary for
a fair statement of the results of operations for the periods shown.  The
results of operations for such periods are not necessarily indicative of the
results expected for the full year or for any future period.





The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities.  On an on-going
basis, the Company evaluates its estimates, including those related to customer
sales, discounts and allowances, long-lived asset impairment, pension and
postretirement plan assumptions, workers’ compensation expense and income
taxes.  Actual results may differ from these estimates.





Concentration of
Credit


The
Company encounters, in the normal course of business, exposure to concentrations
of credit risk with respect to trade receivables.  Ongoing credit
evaluations of customers’ financial conditions are performed and, generally, no
collateral is required.  The Company maintains reserves for potential
credit losses and such losses have not exceeded management’s
expectations.





Revenue
Recognition


Revenue is
recognized when title and risk of loss pass, which is upon receipt of goods by
the independent sales distributors, retailers or third-party
distributors.  For route area sales, the Company sells to independent
sales distributors who, in turn, sell to retailers.  Revenue for sales
to independent sales distributors is recognized upon receipt of the product by
the distributor.  For sales made directly to a customer or a
third-party distributor, revenue is recognized upon receipt of the products by
the retailer or third-party distributor.





Sale
of Routes


Sales
distribution routes are primarily owned by independent sales distributors who
purchase the exclusive right to sell and distribute Tastykake® products in
defined geographical territories.  When the Company sells routes to
independent sales distributors, it recognizes a gain or loss on the
sale.  Routes sold by the Company are either existing routes that the
Company has previously purchased from an independent sales distributor or newly
established routes in new geographies. Any gain or loss recorded by the Company
is based on the difference between the sales price and the carrying value of the
route.  Any potential impairment of net carrying value is reserved as
identified.  The Company recognizes gains or losses on sales of routes
because all material services or conditions related to the sale have been
substantially performed or satisfied by the Company as of the date of the
sale.  In most cases, the Company will finance a portion of the
purchase price with interest bearing notes, which are required to be repaid in
full.  Interest rates on the notes are based on Treasury or LIBOR
yields plus a spread.  The Company has no obligation to later
repurchase a route but may choose to do so to facilitate a change in route
ownership.





-6-




Cash
and Cash Equivalents


The
Company considers all investments with an original maturity of three months or
less on their acquisition date to be cash equivalents.  Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.





Inventory
Valuation


Inventories,
which include material, labor and manufacturing overhead, are stated at the
lower of cost or market, cost being determined using the first-in, first-out
(“FIFO”) method.  Inventory balances for raw materials, work in
progress and finished goods are regularly analyzed and provisions for excess and
obsolete inventory are recorded, as necessary, based on the forecast of product
demand and production requirements.





Property
and Depreciation


Property,
plant and equipment are carried at cost.  Depreciation is computed by
the straight-line method over the estimated useful lives of the
assets.  Buildings and improvements, machinery and equipment, and
vehicles are depreciated over thirty-nine years, seven to fifteen years, and
five to ten years, respectively, except where a shorter useful life is
necessitated by the Company’s decision to relocate its Philadelphia
operations.  Spare parts are capitalized as part of machinery and
equipment and are expensed as utilized or capitalized as part of the relevant
fixed asset.  Spare parts are valued using a moving average method and
are reviewed for potential obsolescence on a regular basis.  Reserves
are established for all spare parts that are no longer usable and have no fair
market value.  Capitalized computer hardware and software is
depreciated over five years.





Costs of
major additions, replacements and betterments are capitalized, while maintenance
and repairs, which do not improve or extend the life of the respective assets,
are expensed as incurred.  For significant projects, the Company
capitalizes interest and labor costs associated with the construction and
installation of plant and equipment and significant information technology
development projects.





In
accordance with Statement of Financial Accounting Standards No.144, long-lived
assets are reviewed for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  In instances where the carrying amount may not be
recoverable, the review for potential impairment utilizes estimates and
assumptions of future cash flows directly related to the asset.  For
assets where there is no plan for future use, the review for impairment includes
estimates and assumptions of the fair value of the asset, which is based on the
best information available.  These assets are recorded at the lower of
their book value or fair value.





The
Company has a conditional asset retirement obligation related to asbestos in its
Philadelphia manufacturing facility.  As a result of the Company’s
decision in May 2007 to relocate its Philadelphia operations, it was able to
estimate a settlement date for the asset retirement obligation and in accordance
with FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, recorded an obligation of $6.6 million which was
the present value of the future obligation.  This obligation will
continue to accrete to the full value of the future obligation over the
remaining period until settlement of the obligation which is expected to occur
in June 2010, while the capitalized asset retirement cost is depreciated through
December 2044, the remaining useful life of the Philadelphia manufacturing
facility.  During the quarter ended March 29, 2008, the Company
recorded $0.1 million in interest associated with the asset retirement
obligation and as of March 29, 2008 the asset retirement obligation totaled $6.8
million.





Grants


The
Company receives grants from various government agencies for employee training
purposes.  Expenses for the training are recognized in the Company’s
income statement at the time the training takes place.  When the
proper approvals are given and funds are received from the government agencies,
the Company records an offset to the training expense already
recognized.





In 2007,
in connection with the decision to relocate its Philadelphia manufacturing
operations, the Company received a $600 grant from the Department of Community
and Economic Development of the Commonwealth of Pennsylvania
(“DCED”).  The opportunity grant has certain spending, job retention
and nondiscrimination conditions with which the Company must
comply.  The Company accounted for this grant under the deferred
income approach and will amortize the deferred income over the same period as
the useful life of the asset acquired with the grant.  The asset
acquired with the grant is expected to be placed into service when the new
manufacturing facility becomes fully operational in 2010.





-7-


In
addition, in 2006, in conjunction with The Reinvestment Funds, Allegheny West
Foundation and the DCED, the Company activated Project Fresh Start (the
“Project”).  The Project is an entrepreneurial development program
that provides an opportunity for qualified minority entrepreneurs to purchase
routes from independent sales distributors.  The source of grant
monies for this program is the DCED.  The grants are used by minority
applicants to partially fund their purchase of an independent sales distribution
route.





Because
the Project’s grant funds merely pass through the Company in its role as an
intermediary, the Company records an offsetting asset and liability for the
total amount of grants as they relate to the project.  There is no
Statement of Operations impact related to the establishment of, or subsequent
change to, the asset and liability amounts.





Marketing
Costs


The
Company expenses marketing costs, which include advertising and consumer
promotions, as incurred or as required in accordance with Statement of Position
93-7, Reporting on Advertising
Costs.  Marketing costs are included as a part of selling,
general and administrative expense.





Computer
Software Costs


The
Company capitalizes certain costs, such as software coding, installation and
testing that are incurred to purchase or create and implement internal use
computer software in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Development or Obtained for Internal Use.  The
majority of the Company’s capitalized software relates to the implementation of
the enterprise resource planning and handheld computer systems.





Freight,
Shipping and Handling Costs


Outbound
freight, shipping and handling costs are included as a part of selling, general
and administrative expense.  Inbound freight, shipping and handling
costs are capitalized with inventory and expensed with cost of
sales.





Pension
Plan


The
Company’s funding policy for the pension plan is to contribute amounts
deductible for federal income tax purposes plus such additional amounts, if any,
as the Company’s actuarial consultants advise to be appropriate.  In
1987 the Company elected to immediately recognize all gains and losses in excess
of the pension corridor, which is equal to the greater of ten percent of the
accumulated pension benefit obligation or ten percent or the market-related
value of plan assets.





The
Company accrues normal periodic pension expense or income during the year based
upon certain assumptions and estimates from its actuarial
consultants.  These estimates and assumptions include discount rate,
rate of return on plan assets, compensation increases, mortality and employee
turnover.  In addition, the rate of return on plan assets is directly
related to changes in the equity and credit markets, which can be very
volatile.  The use of the above estimates and assumptions, market
volatility and the Company’s election to immediately recognize all gains and
losses in excess of its pension corridor in the current year may cause the
Company to experience significant changes in its pension expense or income from
year to year.  Expense or income that falls outside the corridor is
recognized only in the fourth quarter of each year.





In
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 158,
Employers’ Accounting
for Defined Benefit
Pension and Other Postretirement Plans, the Company maintains a liability
on its balance sheet equal to the under-funded status of its defined benefit and
other postretirement benefit plans.





Accounting
for Derivative Instruments


The
Company has entered into certain variable-to-fixed interest rate swap contracts
to fix the interest rates on a portion of its variable interest rate
debt.  These contracts are accounted for as cash flow hedges in
accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“FAS 133”).  Accordingly,
these derivatives are marked to market and the resulting gains or losses are
recorded in other comprehensive income as an offset to the related hedged asset
or liability.  The actual interest expense incurred, inclusive of the
effect of the hedge in the current period, is recorded in the Statement of
Operations.





The
Company has also entered into foreign currency forward contracts to hedge the
future purchase of certain assets for its new facilities, which are denominated
in Australian Dollars (AUD).  These contracts are accounted for as
fair value foreign currency hedges in accordance with FAS
133.  Accordingly, the changes in fair value of both the commitment
and the derivative instruments are recorded currently in the Statement of
Operations, with the corresponding asset and liability recorded on the Balance
Sheet.





-8-


Treasury
Stock


Treasury
stock is stated at cost. Cost is determined by the FIFO method.





Accounting
for Income Taxes


The
Company accounts for income taxes under the asset and liability method, in
accordance with FASB Statement No. 109, Accounting for Income
Taxes.  Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates in effect when the
differences are expected to be recovered or settled.





Net
Income Per Common Share


Net income
per common share is presented as basic and diluted earnings per
share.  Net income per common share – Basic is based on the weighted
average number of common shares outstanding during the period.  Net
income per common share – Diluted is based on the weighted average number of
common shares and dilutive potential common shares outstanding during the
period.  Dilution is the result of outstanding stock options and
restricted shares.  For the thirteen weeks ended March 29, 2008 and
March 31, 2007, 575,928 and 383,646 options to purchase common stock and
restricted shares, respectively, were excluded from the calculation, as they
were anti-dilutive.





Share-based
Compensation


The
Company accounts for share-based compensation in accordance with FASB Statement
No. 123(R), Share-Based
Payment (“FAS 123(R)”).  Share-based compensation expense
recognized during the current period is based on the value of the portion of
share-based payment awards that is ultimately expected to vest.  The
total value of compensation expense for restricted stock is equal to the closing
market price of Tasty Baking Company shares on the date of grant.  FAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately
vest.  The forfeiture rate is based on the Company’s historical
forfeiture experience.  The Company calculated its historical pool of
windfall tax benefits.





Recent
Accounting Statements


In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”), which creates a single definition of fair value, along with a conceptual
framework to measure fair value and to increase the consistency and the
comparability in fair value measurements and in financial
disclosure.  The Company adopted the required provisions of FAS 157
for the quarter ended March 29, 2008. The required provisions did not have a
material impact on the Company’s financial statements.  See Note 6 for
additional information.





In
February 2008, the FASB issued FASB Staff Position (FSP)
FAS 157-2.  This FSP permits a delay in the effective date of
FAS 157 to fiscal years beginning after November 15, 2008, for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the Board and
constituents additional time to consider the effect of various implementation
issues that have arisen, or that may arise, from the application of
FAS 157.  The FASB also issued FSP FAS 157-1 to exclude
SFAS 13, Accounting for
Leases, and its related interpretive accounting pronouncements from the
scope of FAS 157 in February 2008.  The Company is currently
assessing the potential impact that adoption of this statement would have on its
financial statements.





In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“FAS 159”).  This statement permits, but does not require
entities to measure certain financial instruments and other assets and
liabilities at fair value on an instrument-by-instrument basis and is
irrevocable.  At the adoption date, unrealized gains and losses on
financial assets and liabilities for which the fair value option has been
elected would be reported as a cumulative adjustment to beginning retained
earnings. Unrealized gains and losses due to changes in their fair value must be
recognized in earnings at each subsequent reporting date.  This
statement is effective for fiscal years beginning after November 15,
2007.  Although FAS 159 was adopted in the quarter ended March 29,
2008, the Company has not yet elected the fair value option for any items
permitted under FAS 159.




In
December 2007, the FASB issued Statement  No. 141 (Revised 2007),
Business Combinations
("FAS 141(R)"). FAS 141(R) significantly changes the accounting for
business combinations in a number of areas including the treatment of contingent
consideration, acquired contingencies, transaction costs, in-process research
and development and restructuring costs.  In addition, under
FAS 141(R), changes in an acquired entity's deferred tax assets and
uncertain tax positions after the measurement period will impact income tax
expense.  FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning after December 15,
2008.  Earlier adoption is prohibited.  The Company is
currently evaluating the extent to which its current practices, financial
statements and disclosures may change as a result of the adoption of FAS
141(R).




-9-


In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB
No. 51 ("FAS 160"), which establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a
subsidiary. FAS 160 is effective for fiscal years beginning after
December 15, 2008.  Earlier adoption is
prohibited.  The Company is currently evaluating the extent to which
its current practices, financial statements and disclosures may change as a
result of the adoption of FAS 160.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
(“FAS 161”), Disclosures
about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133(“FAS 161”).  FAS 161 applies to all derivative
instruments and related hedged items accounted for under FAS 133.  It
requires entities to provide greater transparency about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under FAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, results of operations, and cash
flows.  FAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008.  Because FAS 161 applies only
to financial statement disclosures, it will not have a material impact on our
consolidated financial position, results of operations or cash
flows.





2.      New
Facilities





In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  This agreement provides for a 26-year lease for a yet to be
constructed 345,500 square foot bakery, warehouse and distribution center
located on approximately 25 acres.  Construction of the facility has
begun and is expected to be completed by the end of 2009.  The Company
expects the new facility to be fully operational in 2010.  The lease
provides for no rent payments in the first year of occupancy.  Rental
payments increase from $3.5 million in the second year of occupancy to $7.2
million in the final year of the lease.





As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.





The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for not
less than 35,000 square feet of office space that commences upon the later of
substantial completion of the office space or April 2009, and which ends
coterminous with the new bakery lease.  The lease provides for no rent
payments in the first six months of occupancy.  Rental payments
increase from approximately $0.9 million in the second year of occupancy to
approximately $1.6 million in the final year of the lease.





In
connection with these agreements, the Company has provided a $2.7 million letter
of credit, which will increase to $8.1 million by the beginning of
2009.  The outstanding amount of the letter of credit will be reduced
starting in year 17 and will be eliminated by the end of the lease
term.





In
addition to the facility leases, the Company expects to purchase high-tech,
modern baking equipment.  This equipment is designed to increase
product development flexibility and efficiency, while maintaining existing taste
and quality standards.  The investment for this project, in addition
to any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010.  In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation to finance this investment and refinance the
Company’s existing revolving credit facilities, as well as to provide for
financial flexibility in running the ongoing operations and working capital
needs.





The
Company anticipates that long-lived assets utilized in the Philadelphia
operations with an aggregate net book value of approximately $20.0 million at
June 30, 2007 would not be relocated to the new facilities or sold as a result
of the relocation. The Company accounts for disposal and exit activities in
accordance with FAS 146, Accounting for Costs Associated with
Exit or Disposal Activities (“FAS 146”) and FAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“FAS 144”). To date, the Company has not
incurred any material obligations related to one-time termination benefits,
contract termination costs or other associated costs as described in FAS
146.





-10-


The
Company has re-evaluated the long-lived assets utilized in its Philadelphia
operations for potential impairment or other treatment in accordance with FAS
144.  Based on the commitment to the planned relocation, neither the
assets to be relocated nor the assets to be left in place at the Philadelphia
operations have suffered impairment.  Therefore the estimated fair
value of the asset groups continues to exceed the carrying amount of such asset
groups.  With respect to the group of assets not expected to be
relocated or sold, certain of the assets included in the group had previously
estimated useful lives that extended beyond the expected project completion in
early 2010.  As such, in the quarter ended June 29, 2007, the Company
changed its estimate of the remaining useful lives of such assets to be
consistent with the time remaining until the end of the project, and accounted
for such change in estimate in accordance with FAS 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3.For the thirteen week period ended March 29, 2008 the
change in estimated useful lives of these assets resulted in incremental
depreciation of $1.3 million.  The after-tax impact of the incremental
depreciation on net income, net income per common share-basic, and net income
per common share-diluted was $0.8 million, $0.10 per share, and $0.10 per share,
respectively, for the thirteen weeks ended March 29, 2008.   The
Company expects that the future pre-tax impact of incremental depreciation
resulting from the change in useful lives will be approximately $1.3 million per
quarter through June 2010, when the new bakery is expected to be fully
operational.





As part of
the relocation of its Philadelphia operations, the Company expects to eliminate
approximately 215 positions.  While the Company hopes to achieve this
result through normal attrition and the reduction of contract labor, it is
probable that the Company will incur obligations related to postemployment
benefits accounted for under FAS 112, Employers' Accounting for
Postemployment Benefits, an amendment of FASB Statements No. 5 and
43.  Due to uncertainties regarding the extent to which the Company
will be successful in managing the reductions through normal attrition and the
reduction of contract labor, the Company cannot reasonably estimate the amount
of such obligations or provide a meaningful range of loss with respect to such
obligations at this time.


3.      Inventories





Inventories
are classified as follows:




March
      29, 2008
              
              
              Dec.
      29, 2007Finished
      goods
              
              $
              2,398
              
              
              $
              2,852Work
      in progress
              
              
              188
              
              
              
              161Raw
      materials and supplies
              
              
              4,659
              
              
              
              4,706$
              7,245
              
              
              $
              7,719




The
inventory balance has been reduced by reserves for obsolete and slow-moving
inventories of $56 and $95 as of March 29, 2008 and December 29, 2007,
respectively.


4.      Credit
Facilities





On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility with 4 banks, consisting of a $55.0 million fixed asset line of
credit, a $35.0 million working capital revolver and a $10.0 million
low-interest loan from the agent bank with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”).  The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a funded debt
covenant, a minimum liquidity ratio covenant and minimum level of earnings
before interest, taxes, depreciation and amortization (“EBITDA”)
covenant.  Interest rates for the fixed asset line of credit and
working capital revolver are indexed to LIBOR and include a spread above that
index from 75 to 275 basis points based upon the Company’s ratio of debt to
EBITDA.  The fixed asset line of credit and the working capital
revolver include commitment fees from 20 to 50 basis points based upon the
Company’s ratio of debt to EBITDA.  The $10.0 million low-interest
loan bears interest at a fixed rate of 5.5% per annum.





On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”). This credit facility bears interest at a blended fixed rate of 4.5%
per annum, participates in the blanket lien on the Company’s assets and contains
customary representations and warranties as well as customary affirmative and
negative covenants essentially similar to those in the Bank Credit
Facility.  Negative covenants include, among others, limitations on
incurrence of liens and secured indebtedness by the Company and/or its
subsidiaries, other than in connection with the Bank Credit Facility and the
MELF Loan, as defined below.





-11-


On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan”). This loan bears interest at a fixed rate of 5.0% per annum, is
secured by the Navy Yard machinery and equipment and contains customary
representations and warranties as well as customary affirmative and negative
covenants.  Negative covenants include, among others, limitations on
incurrence of liens and secured indebtedness by the Company, other than in
connection with the Bank Credit Facility and the PIDC Credit Facility.
Contemporaneously with the closing under the MELF Loan, the Company received a
commitment from the Commonwealth of Pennsylvania Machinery and Equipment Loan
Fund to extend a second $5.0 million loan to the Company.  This second
loan with the Machinery and Equipment Loan Fund is expected to close in
September 2008, and be on substantially the same terms and conditions as the
MELF Loan.





On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, and the MELF Loan (the “Intercreditor Agreement”), and establishes the
priorities and procedures that each lender has in enforcing the terms and
conditions of each of their respective agreements.  The Intercreditor
Agreement permits the group of banks and their agent bank in the Bank Credit
Facility to have the initial responsibility to enforce the terms and conditions
of the various credit agreements, subject to certain specific limitations, and
allows such bank group to negotiate amendments and waivers on behalf of all
lenders, subject to the approval of each lender.





The
Company used a portion of the proceeds received under the Bank Credit Facility
to terminate and repay outstanding indebtedness.  The Company also
expects to utilize proceeds from the Bank Credit Facility, the PIDC Credit
Facility and the MELF Loan to finance the Company’s move of its Philadelphia
manufacturing facility and corporate headquarters to new facilities to be
constructed at the Philadelphia Navy Yard, along with working capital
needs.





5.      Derivative
Instruments





In
order to hedge a portion of the Company’s exposure to changes in interest rates
on debt associated with the Company’s new manufacturing facilities, the Company
entered into certain variable-to-fixed interest rate swap contracts to fix the
interest rates on a portion of its variable interest rate debt. The interest
rate swap contract has a notional value of $8.5 million as of January 31, 2008
that increases to $35.0 million by April 2010.  The Company records as
an asset or liability the cumulative change in the fair market value of the
derivative instrument, and as of March 29, 2008, the Company had recorded a
liability of $0.3 million.  The swap has a fixed LIBOR rate of 3.835%
and expires on September 5, 2012.  The LIBOR rates are subject to
an additional credit spread which could range from 75 basis points to 275 basis
points and was equal to 175 basis points as of March 29, 2008.




During the
third quarter of 2007, the Company entered into commitments to acquire assets
denominated in a foreign currency.  In order to hedge the Company’s
exposure to changes in foreign currency rates, the Company entered into foreign
currency forward contracts with maturity dates ranging from July 2007 to April
2010.  As of March 29, 2008 the notional principle of outstanding
foreign currency forward contracts was $7.2 million Australian Dollar ($6.2
million USD).  As of March 29, 2008 the change in fair value of both
the commitment and the forward currency contracts was $0.5 million.





6.      Fair
Value Measurements





As
described in Note 1, the Company adopted FAS 157 on December 30,
2007.  FAS 157, among other things, defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either a recurring
or nonrecurring basis.  FAS 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such assumptions,
FAS 157




-12-




establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:


Level
      1.
            
            Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;Level
      2.
            
            Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
            
            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.





The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at March 29, 2008:





Fair
      Value Measurement at Reporting Date UsingDescription
            
            Balance
      as of March 29, 2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Financial
      instruments owned:Interest
      rate swaps
            
            $
            (322
            )
            
            $
            —
            
            
            $
            (322
            )
            
            $
            —Foreign
      currency hedges
            
            
            537
            
            
            
            —
            
            
            
            537
            
            
            
            —Total
      financial instruments owned
            
            $
            215
            
            
            $
            —
            
            
            $
            215
            
            
            $
            —





7.      Defined
Benefit Retirement Plans





The
Company maintains a partially funded noncontributory Defined Benefit (“DB”)
Retirement Plan (the “DB Plan”) providing retirement benefits. Benefits under
this DB Plan generally are based on the employees’ years of service and
compensation during the years preceding retirement.  In December 2004,
the Company announced to its employees that it was amending the DB Plan to
freeze benefit accruals effective March 26, 2005.   The Company
maintains a DB Supplemental Executive Retirement Plan (“SERP”) for key employees
designated by the Board of Directors, however, there are no current employees
earning benefits under this plan.  See Note 8 for more
information.  The Company also maintains a frozen unfunded Retirement
Plan for Directors (the “Director Plan”).  The benefit amount is the
annual retainer in the year of retirement.





Effective
February 15, 2007, benefit accruals under the Directors’ Retirement Plan were
frozen for current directors and future directors were precluded from
participating in the plan.  Participants are credited for service
under the Director Retirement Plan after February 15, 2007 solely for vesting
purposes.  On February 15, 2007, the Board of Directors approved a
Deferred Stock Unit Plan (the “DSU Plan”).  The DSU Plan provides that
for each fiscal quarter, the Company will credit DSUs to the director’s account
equivalent in value to $4 on the last day of such quarter, provided that he or
she is a director on the last day of such quarter.  Directors will be
entitled to be paid in shares upon termination of Board service provided the
director has at least five years of continuous service on the
Board.  The shares may be paid out in a lump sum or at the director’s
election, over a period of five years.





The
components of the DB Plan, DB SERP, and DB Directors’ Retirement Plan’s costs
are summarized as follows:





Thirteen Weeks
      Ended3/29/08
              
              
              3/31/07Service
      cost-benefits earned during the quarter
              
              $
              -
              
              
              $
              5Interest
      cost on projected benefit obligation
              
              
              1,234
              
              
              
              1,243Expected
      return on plan assets
              
              
              (1,301
              )
              
              
              (1,306
              )Prior
      service cost amortization
              
              
              (4
              )
              
              
              (4
              )Actuarial
      loss recognition
              
              
              16
              
              
              
              16Net
      DB pension amount credited to income
              
              $
              (55
              )
              
              $
              (46
              )


The
Company made a $0.5 million voluntary cash contribution to the previously frozen
DB Plan in July 2007.  There is a minimum required cash contribution
to the DB Plan in fiscal 2008 of $2.1 million.




-13-


8.      Defined
Contribution Retirement Plans





The
Company maintains a funded Defined Contribution (“DC”) Retirement Plan (the “DC
Plan”), which replaced the benefits provided in the DB Plan.  Under
the DC Plan, the Company makes weekly cash contributions into individual
accounts for all eligible employees.  These contributions are based on
employees’ point values which are the sum of age and years of service as of
January 1 each year.  All employees receive contributions that range
from 2% to 5% of covered compensation relative to their point
totals.  Employees at March 27, 2005, who had 20 years of service or
10 years of service and 60 points, received an additional “grandfathered”
contribution of between 1.5% and 3.5% of salary.  The “grandfathered”
contribution percentage was fixed as of March 27, 2005, and is paid weekly with
the regular contribution until those covered employees retire or separate from
the Company.  These “grandfathered” contributions are being made to
compensate older employees for the shorter earnings period that their accounts
will have to appreciate in value relative to their normal retirement
dates.





The
Company also maintains the Tasty Baking Company 401(k) and Company Funded
Retirement Plan (the “Retirement Plan”).  In the Retirement Plan, all
participants receive a company match of 50% of their elective deferrals that do
not exceed 4% of their compensation as defined in the Retirement
Plan.  Under the Retirement Plan, the waiting period for participation
has been eliminated and participants are offered a broad array of investment
choices.





The
Company also maintains an unfunded defined contribution SERP (“DC SERP”) for one
eligible active employee.





Components
of DC pension amounts charged to income:





Thirteen Weeks
      Ended3/29/08
              
              
              3/31/07Funded
      retirement plan
              
              $
              482
              
              
              $
              516Defined
      contribution SERP
              
              
              97
              
              
              
              90Net
      DC pension amount charged to income
              
              $
              579
              
              
              $
              606





9.      Postretirement
Benefits Other than Pensions





In
addition to providing pension benefits, the Company also provides certain
unfunded health care and life insurance programs for substantially all retired
employees, or Other Postretirement Benefits (“OPEB”).  These benefits
are provided through contracts with insurance companies and health service
providers.    Coverage is maintained for all pre-65 retirees
and for certain post-65 retirees who have qualifying dependents that are
pre-65.  Life insurance for incumbent retirees, as of January 1, 2006,
at company group rates is capped at $20 of coverage.  Incumbent
retirees who purchase coverage in excess of $20 and all new retirees after
January 1, 2006 pay age-based rates for their life insurance
benefit.





Components
of net periodic postretirement benefit cost / (benefit):





Thirteen Weeks
      Ended3/29/08
              
              
              3/31/07Service
      cost
              
              $
              91
              
              
              $
              67Interest
      cost
              
              
              116
              
              
              
              92Amortization
      of unrecognized prior service cost
              
              
              (458
              )
              
              
              (457
              )Amortization
      of unrecognized gain
              
              
              -
              
              
              
              (29
              )Total
      FAS 106 net postretirement benefit
              
              $
              (251
              )
              
              $
              (327
              )





Estimated
company contributions for the thirteen weeks ended March 29, 2008 and March 31,
2007 were $175 and $151, respectively.


10.    Stock
Compensation





At the
2006 Annual Meeting of Shareholders of the Company held on May 11, 2006, the
Company's shareholders approved the Tasty Baking Company 2006 Long-Term
Incentive Plan (the "2006 Plan") as adopted by the Company's Board of Directors
(the "Board") on March 24, 2006.  The aggregate number of shares
available for grant under the Plan is 200,500 shares of the Company’s common
stock as of March 29, 2008.





-14-


The 2006
Plan authorizes the Compensation Committee (the "Committee") of the Board to
grant awards of stock options, stock appreciation rights, unrestricted stock,
restricted stock (“RSA”) (including performance restricted stock) and
performance shares to employees, directors and consultants or advisors of the
Company.  The option price is determined by the Committee and, in the
case of incentive stock options, will be no less than the fair market value of
the shares on the date of grant.  Options lapse at the earlier of the
expiration of the option term specified by the Committee (not more than ten
years in the case of incentive stock options) or three months following the date
on which employment with the Company terminates.





The
Company also has active 2003 and 1997 Long-Term Incentive Plans.  The
aggregate number of shares available for grant under the 2003 plan is 40,400 and
under the 1997 plan is 83,019 as of March 29, 2008.  The terms and
conditions of the 2003 and 1997 plans are generally the same as the 2006
plan.  A notable difference is that the 1997 plan can award shares
only to employees of the Company while the 2003 plan can only award shares to
employees and directors of the Company. The Company also has options outstanding
under the 1994 Long-Term Incentive Plan, the terms and conditions of which are
similar to the 1997 Long-Term Incentive Plan.





Notwithstanding,
the vesting and termination provisions described above, under the terms of the
Change of Control Agreements and Employment Agreements that the Company entered
into with certain executive officers, upon a change of control, the shares
granted as RSAs vest and any restrictions on outstanding stock options lapse
immediately.  Additionally, under the terms of those agreements, in
certain change of control circumstances, shares granted as RSAs may vest after
termination of employment.





A summary
of stock options as of March 29, 2008 is presented below:





Shares
      (000’s)
              
              
              Weighted
                  AverageExercise
      Price
              
              
              Weighted
      Average
                Remaining
                Contractual
      Term
              
              
              Aggregate
                  IntrinsicValue
      (000s)Outstanding
      at Dec. 29, 2007
              
              
              439
              
              
              $
              10.44Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Outstanding
      at March 29, 2008
              
              
              439
              
              
              $
              10.44
              
              
              
              4.67
              
              
              $
              1,055Options
      exercisable at March 29, 2008
              
              
              439
              
              
              $
              10.44
              
              
              
              4.67
              
              
              $
              1,055


As of
March 29, 2008, there was no unrecognized compensation related to nonvested
stock options, as all options are fully vested.  For the thirteen
weeks ended March 29, 2008, there were no options granted and there was no cash
received from option exercises.  There was no compensation expense
recognized in the Condensed Consolidated Statements of Operations for stock
options in the three month periods ended March 29, 2008 or March 31,
2007.





The
Company recognizes expense for restricted stock using the straight-line method
over the requisite service period.  A summary of the restricted stock
as of March 29, 2008 is presented below:





Shares
      (000’s)
              
              
              Weighted
      Average
                Fair
      ValueNonvested
      at December 29, 2007
              
              
              230
              
              
              $
              7.88Granted
              
              
              100
              
              
              
              6.76Forfeited
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Nonvested
      at March 29, 2008
              
              
              330
              
              
              $
              7.54


As of
March 29, 2008, there was $1.587 million of unrecognized compensation cost
related to nonvested restricted stock which is expected to be recognized over a
weighted average period of approximately 2.51 years.





11.           Income
Taxes





The
Company’s effective tax rate was 24.5 percent and 37.5 percent for the three
months ended March 29, 2008 and March 31, 2007,
respectively.  The Company’s effective tax rate can differ from the
composite federal and state statutory tax rate due to certain expenses which are
not deductible for income tax purposes and non-recurring discrete
items.  Non-deductible expense items and discrete items tend to
increase the effective tax rate when pre-tax income is reported and tend to
decrease the effective tax rate when a pre-tax loss is reported. For the quarter
ended March 29, 2008, the Company recorded $0.2 million in non-recurring
discrete expense items related to the write-off of charitable contribution
carryforwards.





-15-





12.           Accumulated
Other Comprehensive Income / (Loss)







Total
comprehensive income, net of taxes, is comprised as follows:




Thirteen Weeks
      Ended3/29/08
              
              
              3/31/07Net
      income / (loss)
              
              $
              (959
              )
              
              $
              876Other
      comprehensive income / (loss)Pension
      plan
              
              
              7
              
              
              
              7Other
      postretirement benefits
              
              
              (275
              )
              
              
              (292
              )Change
      in unrealized gain / (loss)on
      derivative instruments
              
              
              (193
              )
              
              
              (29
              )Total
      other comprehensive income / (loss)
              
              
              (461
              )
              
              
              (314
              )Total
      comprehensive income / (loss)
              
              $
              (1,420
              )
              
              $
              562The
      following table summarizes the components of accumulated other
      comprehensive income / (loss), net of tax:Mar.
      29,
              
              
              Mar.
      31,2008
              
              
              2007Pension
      Plan
              
              $
              (2,874
              )
              
              $
              (3,504
              )Unrealized
      gain / (loss) on derivative instruments
              
              
              (193
              )
              
              
              55Other
      postretirement benefits
              
              
              3,241
              
              
              
              5,131Total
      comprehensive income
              
              $
              174
              
              
              $
              1,682
  -16-
  Item 2.     Management’s Discussion and
Analysis of Financial Condition and Results of Operation


(000’s,
except share, per share and square footage amounts, unless otherwise
noted)


All
disclosures are pre-tax, unless otherwise noted.





Results of
Operations





For
the Thirteen Weeks ended March 29, 2008





Overview





Net loss
for the first quarter of 2008 was $1.0 million or $.12 per fully-diluted
share.  Net loss included $0.8 million, or $0.10 per common share, of
incremental depreciation, after-tax, resulting from the change in the estimated
useful lives of certain assets at the Company’s Philadelphia operations in the
second quarter of fiscal 2007.  The change in estimated useful lives
resulted from the Company’s plans to move from its present Philadelphia
facilities.  Net income for the first quarter of 2007 was $0.9 million
or $.11 per fully-diluted share.





Sales





Gross
sales declined 1.5% in the first quarter of 2008 compared to the same period in
the prior year due to a 4.3% decrease in volume, partially offset by higher
average selling prices.  The volume decline was partially attributable
to the impact of the Easter holiday occurring during the first quarter in 2008
as compared to the second quarter in 2007.  The Company typically
experiences a slow down in sales volumes during this holiday as consumers’
normal purchasing  and consumption patterns change and they
temporarily move away from baked snack goods.  In addition, the
Company had one less selling day in the quarter due to the
holiday.  The Company estimates this change in timing reduced Route
net sales by approximately 3.0 to 3.5 percentage points in the first quarter of
2008 and resulted in a 2.8% decrease in Route net sales as compared to the same
period year ago.  Despite the negative impact of the holiday on total
Route sales, Single Serve volumes showed positive growth in the first quarter of
2008 as compared to the same period a year ago.  This growth was
partially offset by declines in Family Pack sales and higher Route return
expense, which were, in part, a result of the seasonality associated with
Easter.  Non-route net sales decreased 5.2% due to fewer promotional
events with the Company’s largest direct customer towards the end of the first
quarter 2008 as compared to the same period in the prior year.





Cost
of Sales





Cost of
sales for the first quarter of 2008 increased 3.0% versus the first quarter of
2007.  The increase in cost of sales resulted from an 11.2% increase
in variable manufacturing expenses, which was primarily driven by the impact of
industry-wide cost increases for certain key ingredients, including eggs, grains
and oils.  The increase in variable manufacturing expenses was
partially offset by a 4.5% reduction in fixed manufacturing expense due
primarily to lower compensation and other employee related costs.





Gross
Margin





Gross
margin decreased 7.5 percentage points to 25.7% of net sales in the first
quarter of 2008 as compared to the first quarter of 2007.  The decline
in gross margin was partly attributable to $1.3 million in incremental
depreciation resulting from a change in the estimated useful lives of certain
assets that are not expected to move to the Company’s new manufacturing
facility. The incremental depreciation resulted in a 3.1 percentage point
reduction in gross margin.  In addition, the increased cost of
ingredients and packaging accounted for a reduction of approximately 4.8
percentage points.  Partially offsetting these declines were the
benefits from lower fixed manufacturing expenses and product price
increases.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses declined by $1.2 million in the first
quarter of 2008 to 28.1% of net sales, compared to 29.8% of net sales in the
first quarter of 2007.  The decrease was driven by lower compensation
and employee related costs, as well as by lower marketing expense resulting from
a shift in the timing of advertising spending as compared to the same period a
year ago.





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Non-Operating
Items





Interest
expense increased by $141 to $456 in the first quarter of 2008 from $315 in the
first quarter of 2007, primarily due to higher deferred financing fee
amortization related to the Company’s new debt facilities.   The
Company is exposed to market risk relative to its interest expense as certain
of  its notes payable and long-term debt have floating interest rates
that vary with the conditions of the credit market.





Other
income, net, decreased by approximately $31 in the first quarter of 2008
compared to the first quarter of 2007.





The
effective income tax rate for state and federal taxes was 24.5% and 37.5% for
the thirteen weeks ended March 29, 2008 and March 31, 2007,
respectively.  For the quarter ended March 29, 2008, the Company
recorded $0.2 million in non-recurring discrete expense items related to the
write-off of charitable contribution carryforwards.





Liquidity and Capital
Resources





Current
assets at March 29, 2008 were $32,037 compared to $30,984 at December 29, 2007,
and current liabilities at March 29, 2008 were $15,921 compared to $16,954 at
December 29, 2007.   The increase in current assets was driven by
an increase in accounts receivable of $0.9 million, resulting from higher sales
as compared to the prior quarter.  The $1.0 million decrease in
current liabilities was primarily due to a reduction of $0.8 million in employee
related costs.





On May 9,
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  This agreement provides for a 26-year lease for a yet to be
constructed 345,500 square foot bakery, warehouse and distribution center
located on approximately 25 acres which the Company expects to be fully
operational in 2010.  The lease provides for no rent payments in the
first year of occupancy.  Rental payments increase from $3.5 million
in the second year of occupancy to $7.2 million in the final year of the
lease.





As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating $1.2 million annually over the remainder
of the term.





The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for not
less than 35,000 square feet of office space.  The lease will commence
upon the later of substantial completion of the office space or April 2009, and
will end at the same time as the new bakery lease.  The lease provides
for no rent payment in the first six months of occupancy.  Rental
payments increase from approximately $0.9 million in the second year of
occupancy to approximately $1.6 million in the final year of the
lease.





In
connection with these agreements, the Company provided a $2.7 million letter of
credit, which will increase to $8.1 million by the beginning of
2009.  The outstanding amount of the letter of credit will be reduced
starting in 2026 and will be eliminated by the end of the lease
term.  As of March 29, 2008, the outstanding letter of credit under
this arrangement totaled $2.7 million.





In
addition to the facility leases, the Company expects to purchase high-tech,
modern baking equipment.  This equipment is designed to increase
product development flexibility and efficiency, while maintaining existing taste
and quality standards.  The Company anticipates that this project,
when completed, will generate approximately $13.0 to $15.0 million in pre-tax
cash savings, after taking into account the impact of the new leases, but before
any debt service requirements resulting from the investment in the
project.  The investment for this project, in addition to any costs
associated with the agreements described above, is projected to be approximately
$75.0 million through 2010.  In September 2007, to finance this
investment and refinance the Company’s existing revolving credit facilities, as
well as to provide for financial flexibility in running the ongoing operations
and working capital needs, the Company closed on a multi-bank credit facility
and low-interest development loans provided in part by the Commonwealth of
Pennsylvania and the Philadelphia Industrial Development
Corporation.








Cash
and Cash Equivalents





Historically,
the Company has been able to generate sufficient amounts of cash from
operations.  Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages.  The Company
maintains a Bank Credit Facility, a PIDC Credit Facility and MELF Loan, as
defined below, and utilizes certain capital and operating leases.





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Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.





On
September 6, 2007, the Company entered into a 5 year, $100.0 million secured
credit facility, consisting of a $55.0 million fixed asset line of credit, a
$35.0 million working capital revolver and a $10.0 million low-interest loan
from the agent bank in partnership with the Commonwealth of Pennsylvania (the
“Bank Credit Facility”).  The Bank Credit Facility is secured by a
blanket lien on the Company’s assets and contains various non-financial and
financial covenants, including a fixed charge coverage covenant, a funded debt
covenant, a minimum liquidity ratio covenant and a minimum level of earnings
before interest, taxes, depreciation and amortization (“EBITDA”)
covenant.  Interest rates for the fixed asset line of credit and
working capital revolver are indexed to LIBOR and include a spread above that
index from 75 to 275 basis points based upon the Company’s ratio of debt to
EBITDA.  The fixed asset line of credit and the working capital
revolver include commitment fees from 20 to 50 basis points based upon the
Company’s ratio of debt to EBITDA. The $10.0 million low-interest loan is at a
fixed rate of 5.5% per annum.





On
September 6, 2007, the Company entered into a 10 year, $12.0 million secured
credit agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”). The PIDC Credit Facility bears interest at a blended fixed rate of
4.5% per annum and contains customary representations and warranties as well as
customary affirmative and negative covenants essentially similar to those in the
Bank Credit Facility.  Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company
and/or its subsidiaries, other than in connection with the Bank Credit Facility
and the MELF Loan, as defined below.





On
September 6, 2007, the Company entered into a 10 year, $5.0 million Machinery
and Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania
(“MELF Loan”).  This loan bears interest at a fixed rate of 5.0% per
annum and contains customary representations and warranties as well as customary
affirmative and negative covenants.  Negative covenants include, among
others, limitations on incurrence of liens and secured indebtedness by the
Company, other than in connection with the Bank Credit Facility and the PIDC
Credit Facility.  Contemporaneously with the closing under the MELF
Loan, the Company received a commitment from the Commonwealth of Pennsylvania
Machinery and Equipment Loan Fund to extend a second $5.0 million loan to the
Company.  This second loan with the Machinery and Equipment Loan Fund
is expected to close in September 2008, and be on substantially the same terms
and conditions as the MELF Loan.





On
September 6, 2007, the Company entered into an agreement which governs the
shared collateral positions under the Bank Credit Facility, the PIDC Credit
Facility, and the MELF Loan (the “Intercreditor Agreement”), and establishes the
priorities and procedures that each lender has in enforcing the terms and
conditions of each of their respective agreements.  The Intercreditor
Agreement permits the group of banks and their agent bank in the Bank Credit
Facility to have the initial responsibility to enforce the terms and conditions
of the various credit agreements, subject to certain specific limitations, and
allows such bank group to negotiate amendments and waivers on behalf of all
lenders, subject to the approval of each lender.




In order to hedge a portion
of the Company’s exposure to changes in interest rates on debt associated with
the Company’s new manufacturing facilities, the Company entered into certain
variable-to-fixed interest rate swap contracts to fix the interest rates on a
portion of its variable interest rate debt. The interest rate swap contract has
a notional value of $8.5 million as of January 31, 2008 that increases to $35.0
million by April 2010. The
Company records as an asset or liability the cumulative change in the fair
market value of the derivative instrument, and as of March 29, 2008, the Company
had recorded a liability of $0.3 million.  The swap has a fixed LIBOR
rate of 3.835% and expires on September 5, 2012. The LIBOR rates are subject to
an additional credit spread which could range from 75 basis points to 275 basis
points and was equal to 175 basis points as of March 29,
2008.





Net cash
used for investing activities for the quarter ended March 29, 2008 was $9,159,
primarily consisting of $8,877 for capital expenditures resulting primarily from
the implementation of the Company’s new manufacturing strategy.





Net cash
from financing activities for the quarter ended March 29, 2008 totaled $12,096,
primarily driven by increased borrowings of long-term debt of $11.0 million
primarily due to expenditures related to the Company’s new manufacturing
facility.





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The
Company anticipates that for the foreseeable future cash flow from operations,
along with the continued availability under the Bank Credit Facility, the PIDC
Credit Facility and the MELF Loan will provide sufficient cash to meet operating
and financing requirements.  The Company anticipates capital
expenditures of approximately $32.0 million for fiscal 2008, $26.0 million of
which are expenditures associated with the Company’s new manufacturing
facility.





Critical
Accounting Policies and Estimates




Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on the condensed consolidated financial statements and accompanying notes
that have been prepared in conformity with GAAP. The preparation of such
condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.




Included
in the Company’s Annual Report on Form 10-K for fiscal 2007 are the significant
accounting policies of the Company, which are described in Note 1 to the
consolidated financial statements, and the critical accounting estimates, which
are described in the Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the 2007 Form 10-K.  Information
concerning the Company’s implementation and impact of new accounting standards
is included in Note 1 of the condensed consolidated financial statements
included herein.  Otherwise, there were no changes in the Company’s
critical accounting policies and estimates in the first quarter of 2008 which
had a material impact on the Company’s financial condition, change in financial
condition, liquidity or results of operations.





Forward-Looking
Statements





Statements
contained in this Quarterly Report on Form 10-Q, including but not limited to
those under the headings  “Risk Factors” and “Management’s Discussion
and Analysis,” contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and are subject to the safe
harbor created by that Act.  Such forward-looking statements are based
upon assumptions by management, as of the date of this Report, including
assumptions about risks and uncertainties faced by the Company.  These
forward-looking statements can be identified by the use of words such as
"anticipate,'' "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,''
"plan,'' "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is
expected to'' and other similar terms.  They may include comments
about relocating operations and the funding thereof, legal proceedings,
competition within the baking industry, concentration of customers, commodity
prices, consumer preferences, long-term receivables, inability to develop brand
recognition in the Company’s expanded markets, production and inventory
concerns, employee productivity, availability of capital, fluctuation in
interest rates, pension expense and related assumptions, changes in long-term
corporate bond rates or asset returns that could affect the pension corridor
expense or income, governmental regulations, protection of the Company’s
intellectual property and trade secrets and other statements contained herein
that are not historical facts.





Because
such forward-looking statements involve risks and uncertainties, various factors
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements, including, but not limited to, changes in
general economic or business conditions nationally and in the Company’s primary
markets, the availability of capital upon terms acceptable to the Company, the
availability and pricing of raw materials, the level of demand for the Company’s
products, the outcome of legal proceedings to which the Company is or may become
a party, the actions of competitors within the packaged food industry, changes
in consumer tastes or eating habits, the success of business strategies
implemented by the Company to meet future challenges, the costs to lease and
fit-out a new facility and relocate thereto, the costs and availability of
capital to fund improvements or new facilities and equipment, the retention of
key employees, and the ability to develop and market in a timely and efficient
manner new products which are accepted by consumers.  If any of our
assumptions prove incorrect or should unanticipated circumstances arise, our
actual results could differ materially from those anticipated by such
forward-looking statements.  The differences could be caused by a
number of factors or combination of factors, including, but not limited to,
those factors described in the Company’s 2007Annual Report on Form 10-K (“2007
Form 10-K”), “Item 1A, Risk Factors.”  There can be no assurance that
the new manufacturing facility described herein will be
successful.  The Company undertakes no obligation to publicly revise
or update such forward-looking statements, except as required by
law.  Readers are advised, however, to consult any further public
disclosures by the Company (such as in the Company’s filings with the SEC or in
Company press releases) on related subjects.





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Item
3.          Quantitative and Qualitative
Disclosures about Market Risk





Not
required for smaller reporting companies.








Item
4.          Controls and
Procedures





(a) Evaluation of Disclosure Controls
and Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports filed or
submitted pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure at a reasonable assurance
level that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.





Management
of the Company, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of March 29, 2008.  Based upon the evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of March 29,
2008.




(b)
Changes in Internal Control over Financial Reporting





During the
thirteen weeks ended March 29, 2008, there have been no changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





-21-


TASTY
BAKING COMPANY AND SUBSIDIARIES





PART II.  OTHER INFORMATION








Item
6.        Exhibits





(a)
            Exhibits:




Exhibit
      31 (a) –
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Actof
      2002.Exhibit
      31 (b) –
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Actof
      2002.Exhibit
      32 –
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      theSarbanes-Oxley
      Act of 2002.







-22-




TASTY
BAKING COMPANY AND SUBSIDIARIES





SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.




TASTY BAKING
      COMPANY(Company)May
      7, 2008
              
              
              /s/ Paul D.
      Ridder(Date)
              
              
              PAUL
      D. RIDDERSENIOR
      VICE PRESIDENTANDCHIEF
      FINANCIAL OFFICER(Principal
      Financial Officer)





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